I am the chairman of Revolution PAC as well as the president and co-founder of the Social Security Institute (along with Mike Korbey). I also serve on the Advisory Board of Gold Standard 2012. Previously, I was chief economist to Jack Kemp at Empower America, former staff director of the congressional Joint Economic Committee, former vice president and chief economist of the U.S. Chamber of Commerce and former Reagan White House adviser.

Herman Cain's Tax Plan Is a Winner, But Here's Your Exploding Cigar

Herman Cain wants to bake up a new three-layer tax cake to replace the current federal tax stew. He calls it the 9-9-9 Plan, which consists of a brand-new retail sales tax layered on top of a new-and-improved business transactions corporate tax (a substitute for the current corporate income and payroll taxes), in turn layered on top of a new-and-improved comprehensive factor income tax (a replacement for the current mishmash of individual income and payroll taxes). The temptation to nibble just a little 9 percent of each layer of this new tax delight is precisely the kind of fatal attraction voters must scrutinize and contemplate very carefully before yielding to 9-9-9’s seductive appeal.

It is the best of plans; it is the worst of plans. Actually, it is a “second-best” of plans; it is among the very worst of plans. It’s a winner; here’s your prize, an exploding cigar.

Michele Bachmann wisecracked during the most recent GOP presidential debate that if you turn the 9-9-9 Plan upside down it becomes the Devil’s Plan. Or, as she said so coyly, “The devil’s in the details.” Yes, he is because when you flip Cain’s 9-9-9 Plan upside down and turn it around to view it from all angles, it does appear to contain the devil’s handiwork.

Herman Cain is not some political Beelzebub in this election-year Passion play. In fact, having served on the Kemp Commission on Economic Growth and Tax Reform he almost certainly is more knowledgeable about the economics of taxation and more principled in his pro-growth, small-government philosophy than any other Republican presidential candidate in the race, save Ron Paul. It is just that, as Eve learned the hard way, the devil beguiles and deceives through third-party innocents, whom he manipulates and uses to his own ends. He seduces the mind by making error appealing, by deceiving with the lies of worldly conventional wisdom. Hey, a little nibble’ll do ya.

OK, enough with the biblical metaphors. The 9-9-9 Plan is a member of what I call the family of taxonomically equivalent tax systems, which define the tax base in an economically proper manner, albeit in different forms, and minimize the deadweight-loss tax burden on the economy. The current tax system is not a member of this family nor are most of the so-called “tax reform” plans making the rounds in Washington, DC. Since each member of this tax family taxes essentially the same base (the 9-9-9 Plan’s tax bases average about 77 percent of GDP), any linear combination of taxes belonging to the family minimizes economic inefficiency, and the separate tax rates applied to the constituent tax bases can simply be added together to derive the overall tax rate.

When Cain’s 9-9-9 Plan is analyzed objectively with all of its virtues and vices on display, what one observes immediately is the virtues are all economic, and the vices are all political. Which is small consolation because it means the 9-9-9 Plan would soon become a vicious bait-and-switch scam once enacted into law. The temptation would be such that no politician would be able to resist—raise the rates; narrow the bases.

In economic/mathematical terms, a linear combination of these three correctly designed and taxonomically equivalent taxes makes sense and would be a vast improvement over the current system. Politically, however, adding a third “tax handle” by which politicians can grab people—now retail sales at the cash register in addition to personal income at the payroll window and business revenue before it leaves the office—creates what Michele Bachmann rightly called a brand-new tax stream to squeeze more revenue out of the people.

The allure of the 9-9-9 Plan is rooted in its simplicity and its economic virtues. It is so economically virtuous, in fact, that under the right, tightly controlled political conditions—circumstances unfortunately that never will prevail for long in the real world of politics—it is a most excellent plan.

According to a study conducted by the economic consulting firm Fiscal Associates, Inc., replacing the current federal tax system with something like the 9-9-9 Plan would remove both the existing tax bias in favor of consumption against saving and investment, and also remedy the current tax bias against exports in favor of imports. Consequently:

In the long run GDP would be nearly $2 trillion larger than the 2008 baseline or nearly 15% higher. The private business capital stock would be more than one-third higher. Hours worked would be 4.4% higher translating into 6 million more jobs. Wage rates will be 10% higher. Total federal receipts would be nearly 15% higher.

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